The art of investing

Print This Post A A A

Key points

  • Collectibles now account for 10% of ultra high net worth individuals’ portfolios.
  • Australian art market is going through a transition.
  • Although local market is dictated by a sense of caution this does not mean it’s time to stay away.

In a recent white paper, Barclays Private Wealth Management (in London) stated that collectibles now accounted for over 10% of portfolios held by individuals described as Ultra High Net Worth Individuals (UHNWI – investable assets over US$30M). Of those holding collectible (or treasure, as it is described in the paper), 85% hold fine art and sculpture. It is perhaps no surprise that those from the BRICs economies feature heavily in these statistics, as do those from the UAE, who have had a long predilection with tangible assets. This data is further verified by the CapGemini / RBC World Wealth Report that states despite property and heavy investment back into the equities markets over the last 24 months, ‘Passion Investments’ still feature strongly.

The global market

October is an important month for the art market as a whole as the world’s key collectors / investors descend on London for the pre-eminent contemporary fair, Frieze (and its associate fair, Frieze Masters) and the evening sales held by the big four auction houses. It also allows Christie’s and Sotheby’s, in particular, to whet the appetite with the preview of major lots ahead of the blockbuster New York sales in late November/early December.

The energy is almost palpable. The media coverage is now enormous, particularly as with every major evening sale, art history is being written as world record prices tumble with such consistency that we are running out of superlatives to describe the sale that was and the sale that is yet to come. As Barclays point out however, boom times for auction houses don’t necessarily mean boom time for investors. While sales such as Christie’s extraordinary May Contemporary Evening sale in New York, which realised US$750 million on the evening, are alluring, they lack substance, with results born from emotive rather than cognitive reactions. While I think this is perhaps a broad-brush view, what the paper does highlight, is the need for the art investor to understand that Fine Art, like all good things in life and all investment classes, carries risk.

It is widely acknowledged that the Fine Art market is terribly inefficient, lacks liquidity comparable to that of more regular investments and is often extremely opaque. A misunderstanding or mismanagement of these risks is the ultimate undoing for any investment in art. It is particularly important to understand these risks in the smaller art markets, which are not as robust or deep as the key Contemporary, Impressionist and Modern or even Old Masters sectors.

The local view

The Australian art market overall is experiencing a transition, which is presenting a number of challenges. On the one hand, the prestigious Melbourne Art Fair was strongly attended and the major galleries all experienced a renewed fervour and excitement from collectors/investors. On the other, there appears to be a sense of unease in the auction rooms as if the thread to the Sword of Demacles is about to snap.

 Anna Schwartz Gallery, Melbourne Art Fair

It is clear that the Australian Art market, indeed the Global art market as a whole, has experienced a volume of “hot” money. The Aussie market is very much driven by its domestic buyers and that has meant that it has had an inability to absorb the impact of “hot” money to the same degree of the larger markets such as Europe, the UK and the US. In many respects, the Australian market has mirrored the Indian Art market, which rallied exceptionally between 2004 – 2007 before its drop from grace. It ultimately is a reflection of the lack of a sustainable international buying base, which presents these challenges and in the case of the Australian market, made it less resilient to the cycle of mini-booms and busts that are a hallmark of “hot” money entering and leaving a market place.

Pearl Lam Galleries, Melbourne Art Fair

Certainly, it is no longer good enough to lay the responsibility for a tepid secondary market in Australia at the doorstep of the GFC’s legacy or Cooper’s submissions to reform SMSF investment back in 2011. Granted, these events caused instability, however the truth is that a flight of “hot” money trying to leave the market, has seen the secondary market stagnate.

The challenges

Auction houses face huge challenges finding major lots, which are fresh to market with only four works breaching the $1 million plus mark so far in 2014. The volume of work being offered in the sub $30,000 are often forced to low-ball estimates, with a view of discouraging a potential seller or simply to create good clearance rates by volume and value. Due to the lack of serious international interest, for now, the Aussie market is dictated by an overriding sense of caution as a result. So does this mean that Australian Art is not worth investing in?

Very much to the contrary. One of the significant traits of “hot” money is that it is often ill-educated and gets despondent very quickly, regardless of asset class, and often reverts to a sell at all costs mentality – Equity markets are very strong at the moment – get me out and I’ll cover my loss through investing here. For the sophisticated investor, who holds art as a part of their portfolio, there is an understanding that while short-term liquidity is compromised, this type of market presents opportunity. The smart investor recognises that now of all times – as Australians become wealthier (the 2014 World Wealth Report stated that the number of UHNW increased by 9.9% in 2013) – is the time to acquire what will become highly sought-after and fought over in a few years from now, in just the same way as we witnessed this trend after the 1987 stockmarket crash and the 2000- dotcom crash.

Furthermore, contemporary artists and their dealers have recognised and embraced the need to develop a genuine and sustainable client base. The Melbourne Art Fair is a fantastic showcase and event and has been a key date in the diary, however it is a little introverted and Australian-centric. The commitment by artists to exhibit consistently with representation overseas is important but so is the commitment by the leading galleries to exhibit at the major international art fairs such as the Korean Art Fair, Art Basel Hong Kong (formerly the Hong Kong Art Fair) and fairs such as Masterpiece and Art 15 in London. This of course incurs costs and involves risks for both the artists and the galleries but this is their investment.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Follow the Switzer Super Report on Twitter

Also in the Switzer Super Report:

Also from this edition

View More Articles